TURKEY AND THE EU:POLITICS AND ECONOMICS OF ACCESSION

HARRY FLAM

CESIFO WORKING PAPER NO. 893CATEGORY 1: PUBLIC FINANCE

MARCH 2003

An electronic version of the paper may be downloaded• from the SSRN website: www.SSRN.com• from the CESifo website: www.CESifo.de

CESifo Working Paper No. 893

TURKEY AND THE EU:POLITICS AND ECONOMICS OF ACCESSION

Abstract

This paper discusses political and economic aspects of Turkish accession. Underpresent rules, Turkey would have the greatest number of council votes withintwenty years, and receive the largest budget transfer. Free migration may increasethe Turkish immigrant population in Germany from 2 to 3.5 million in thirtyyears. Most of the economic effects will be felt by Turkey, particularly inagriculture. The main obstacles to accession are not economic, but political.Historical experience prevents Turkey from eliminating the decisive political roleof the military, giving Kurds and other minorities cultural rights and upholdingbasic human rights.

JEL Code: F17, F22, H23.

Harry FlamInstitute for International Economic Studies

Stockholm UniversitySE-10691 Stockholm

Swedenharry.flam@iies.su.se

Part of this work was done in cooperation with Subidey Togan, BilkentUniversity, Ankara, but the responsibility for the contents is solely mine. I amgrateful to him and to Refik Erzan for comments without implication. Excellentresearch assistance was provided by José Mauricio Prado Jr. and excellent editingby Christina Lönnblad.

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1. Introduction

Turkish accession to the EU is again making headlines in mass media. The EU has

decided to accept the three Baltic countries, five Central and Eastern European countries,

Cyprus and Malta as members in 2004. It has also set a timetable for the accession of

Bulgaria and Romania, but Turkey has not been given a timetable, despite its status as

candidate for membership. The official reason given in the latest Progress Report

prepared by the European Commission (2002) is that Turkey does not fulfill the political

and human rights criteria for membership as laid down by the European Council in

Copenhagen in 1993. Unofficially, the resistance to Turkish accession is also based on

fears of large scale immigration and the argument that Turkey is not European: Islam is

the predominant religion and most of the population and territory – except a few per cent

– are located in Asia.

This paper tries to answer the following questions: Which are the most important

economic aspects of Turkish accession to the EU? How important are these for Turkey

and the EU respectively? Which are the political obstacles to accession? Are they more

important than the economic obstacles?

2. A short history of EU-Turkish relations

Turkey applied for associate membership of the EU - the EEC at that time - already in

1959. The application resulted in an Association Agreement in 1963 whereby Turkey and

the EU would conditionally and gradually create a customs union by 1995 at the latest.

The customs union was considered as a step towards full membership at an unspecified

future date. The EU unilaterally granted Turkey financial assistance and preferential

tariffs in a first stage, but the second stage of gradual, mutual reductions in tariffs and

non-tariff barriers was delayed due to economic and political conditions in Turkey in the

1970´s and the early 1980´s.

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Turkey applied for full membership in 1987. The response in 1989 was that the major

ongoing changes in the EU and the transition of Eastern Europe and the Soviet Union

made it impossible to undertake accession negotiations at that time. However, new efforts

were made to realize the customs union, which were actually successful. It was gradually

introduced during the period 1996-2001 and trade in industrial goods between Turkey

and the EU is now free from tariffs and quantitative restrictions. Turkey has proceeded to

align its trade policies with the EU vis-à-vis third countries, granting preferential tariffs to

countries in Central and Eastern Europe, the Middle East and North Africa and the

signatories of the Lomé Convention, and has adopted technical and administrative aspects

of EU trade policy. The customs union is only one part of the Single Market, however.

Turkey still has a considerable way to go before it has established conditions for the free

movement of services, including rights of establishment, agricultural products, capital

and labor. It has made progress in the areas of common standards, the protection of

intellectual and industrial property rights and competition rules, agricultural policy and

financial regulation.

When a time table for enlargement took shape in the late 1990´s, it became difficult to

keep the Turkish application on hold. A breakthrough came at the Helsinki meeting of the

European Council in 1999, when Turkey attained the status of candidate for membership.

It now has a so-called Accession Partnership with the EU, which means that the EU is

cooperating with Turkey to enable it to adopt the acquis communitaire, the legal

framework of the EU. However, in contrast to other countries, Turkey has not received a

time table for accession. The revision of the number of votes and their distribution in the

Council of Ministers agreed on during the Nice summit in 2000 did not take Turkish

membership into account, which effectively meant that the EU-15 did not plan for Turkey

to become a member in the foreseeable future.

3. Democracy, human rights and the role of history

The main official reason for keeping Turkey out of the EU has been its failure to live up

to the political criteria for membership, that is, the democratic and human rights criteria.

3

But to understand the Turkish position and the real difficulties facing Turkey in fulfilling

the criteria, some knowledge of the historical background is necessary.

The role of history

The Turkish Republic was established in 1923, after the attempted dissolution of the

Ottoman Empire by western powers at the end of World War I, and a war of liberation

against Greek occupation. At the height of its power in the 16th century under Süleyman

the Great, the Ottoman Empire stretched from present day Algeria in the west to the

Persian Gulf in the east, and from Budapest and the Ukraine in the north to Aden in the

south. The Ottomans were engaged in the European wars in the 17th century and had lost

a large part of their European territories at the end of the century. The 18th century saw

constant wars and defeats against an expanding Russian Empire. The Ottoman Empire

had become so weakened at the beginning of the 19th century that it earned the epithet

”the sick man of Europe”. Frequent wars were not the only reason. The population was

divided into religious communities with far-reaching autonomy in many respects, the so-

called millet system. Ethnic background played a lesser role than religious affiliation and

tribal loyalty. However, in the 19th century, the religious communities were redefined into

national and geographic terms and now demanded independence. A large number of

European nations emerged from the Empire: first Greece, then Romania, Bulgaria, Serbia

and Albania. Bosnia-Hercegovina was taken over by the Habsburgs and Cyprus by Great

Britain. The last of the North African holdings were lost to Italy at the beginning of the

20th century. The Ottomans participated in World War I on the German side, and the

victorious western powers planned the complete dissolution of Turkey as a state at the

end of the war.

For Kemal Atatürk, the principal founder of the new Turkish republic, it was of

paramount importance that that the history of disintegration would not repeat itself. If the

republic were to survive and keep its territorial integrity, it must build on a common

nationality, defined foremost by a common language, be secular, become westernized and

refrain from expansionism. The common language and secularity would serve to create

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loyalty to the nation and the state, not to ethnic groups and religious communities, and

westernization would help the backward young nation obtain strength through

development and industrialization. (The Ottomans had instituted westernization projects

already in the 18th and 19th centuries, but with limited success.) Turkish security policy is

also shaped by Ottoman history. The Ottoman Empire was expansionist and engaged in

endless wars. The republic has tried to avoid conflicts with external powers through the

balancing of power. The most important element of this strategy has been its NATO

membership , whereby it gained western support against the age-old Russian-Soviet

threat. Another element is the military cooperation with Israel, serving as a balance

against its southern neighbors. (On Turkish foreign policy, see Aydin, 1998.)

Turkey’s desire to become an EU member must be seen in light of the principles

underlying the Turkish republic and Turkish security policy; it is a logical step along the

path laid out by Atatürk. Turkey wants to become a developed, European country and

membership will help it achieve this goal. Furthermore, it will help the country maintain

security and stability in its relations with its northern, eastern and southern neighbors.

Turkey’s elite, that is the military, most political parties, the powerful central bureaucracy

and intellectuals, generally embraces the founding principles of the Turkish republic and

is consequently strongly in favor of membership. Membership also enjoys wide public

support, with opinion polls generally showing 60-70 per cent of those polled in favor of

full membership.

Democracy and the role of the military

In the constitution, the military was given a special role in safeguarding the republic and

its founding principles. In practice, although not formally, it has a decisive voice in issues

of internal and external security and foreign policy through the national security council,

which is composed of representatives from the military and elected politicians, among

them the president and the prime minister. The military has temporarily taken over power

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on three occasions since World War II, in 1960, 1971 and 1980, and has toppled one

government by issuing an ultimatum, in 1997.

It is clear that the decisive role of the military in internal politics and external relations is

inconsistent with democratic principles. The military should be under the control of the

parliament and the government. However, that is not how it is seen by the military and a

large majority of the Turkish public. The coup in 1960 was precipitated by a request from

the political party in power that the military help suppress the opposition party; the

ultimatum and the following military takeover in 1971 came after several years of

widespread political violence and calls for the military to step in; the coup in 1980 took

place in the middle of a severe economic crisis and after political violence that had

claimed about 20 lives per day in the streets in 1979 and 1980; the ultimatum in 1997 was

aimed at stopping the systematic islamization in the public sector pursued by one of the

coalition parties, later outlawed as being unconstitutional. The fact is that the role of the

military in Turkish politics is seen in a positive light by large segments of the population

and the military is generally held in high regard by most Turks.1 It may be speculated that

the role of the military as a guarantor of democracy and political stability creates a moral

hazard problem of the first order. It allows politicians to act in a less responsible manner,

in the knowledge that the military will step in and reestablish stability, law and order if

needed.

Minority and human rights

Minorities have been an extremely sensitive issue since the creation of the republic.

Turkey recognized the religious and communal rights of its non-Muslim minorities,

Christians and Jews, in the Lausanne Peace Treaty of 1923, but has placed severe

restrictions on the training of clergy, religious education and communal property rights.

All Muslims − who constitute 98 per cent of the population − are regarded as Turks,

1 Comparing the military interventions in Turkey in 1960, 1971 and 1980, to Latin American interventions,the Turkish political scientist Ziya Önis (1995) writes that “… the underlying motive in each case has beento ‘re-equilibrate’ democracy, as opposed to a desire to assume power for its own sake and on a longer-termbasis as a legitimate alternative to civilian rule.”

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despite their being composed of several different ethnic groups. Most groups are fairly

well assimilated, with the important exception of the large Kurdish minority based in the

southeast of the country. The Kurdish population is estimated to about 13 million, i.e.

roughly 20 per cent of the total population.

Given the history of disintegration of the Empire as a result of emerging nationalism, the

ethnic Turkish majority views expressions of Kurdish nationalism as a threat to the

territorial integrity of Turkey. It can point to recent decades of armed conflict with

Kurdish nationalists that is said to have cost 30 000 lives and has forced hundreds of

thousands of Kurds from their villages to urban areas in Turkey or abroad. Five and six

million Kurds live in bordering parts of Iraq and Iran, respectively, and about one million

in northern Syria. Turkey fears that the Kurds will unite and create an independent state.

It is telling that the Turkish army keeps a close watch on the presently autonomous

northern, Kurdish, part of Iraq, and has sought assurance from the United States that Iraq

will not be split up in case of a change of rule.

In order to assimilate various ethnic groups and foster a common Turkish identity,

Turkish laws have severely restricted the public use of languages other than Turkish as

well as other expressions of separate cultural identity. The use of minority languages in

public institutions, notably schools and universities, and mass media has been prohibited.

Recently, and under the pressure from the EU, the constitution was changed to allow

some public use of minority languages. The most recent Accession Report by the

European Commission (2002) reports that Turkish authorities are continuing their

repression of the public use of Kurdish, using other laws than those that were changed.

There is a clear connection between the severe limitations placed on the exercise of

cultural or minority rights and the widespread abuse of human rights by the military, the

police, courts and the prison system. An additional problem is that laws are frequently not

implemented, or implemented in an inconsistent manner.

The Copenhagen criteria and Turkey as the Other of Europe

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The Copenhagen meeting of the European Council in 1993 set up several criteria for

membership in preparation for Eastern enlargement. These can be divided into political,

human rights and economic criteria. In terms of political and human rights criteria,

membership requires " ... stability of institutions guaranteeing democracy, the rule of law,

human rights and respect for and protection of minorities". The European Commission

has faulted Turkey for human rights violations and lack of control by elected politicians

over the military. In its review in 2002, the Commission notes progress in meeting the

political criteria, including changes in the constitution, but finds that the criteria are still

not met in such areas as human rights and freedom of expression and association, and that

existing laws are often not implemented.

Meeting the economic criteria is not the major problem for Turkish membership. Turkey

has recently reformed its legislation and policies in areas such as financial services,

telecommunications, electricity generation and distribution, and agriculture to meet the

these demands. The major problem lies in meeting the political and human rights criteria.

Placing the military under full political control and ridding it of its power in the judicial

system would constitute a break with the fundamental principles guiding the Turkish

republic and an ideology with deep roots in the Turkish historical experience. The same

can be said about recognizing individual and collective cultural rights for minorities,

primarily the Kurds, although in this case, the problem seems to be less monumental.

It is quite clear that the EU has been dragging its feet regarding Turkey's application for

membership. Unlike the other candidate countries, Turkey seems to have no strong

proponent among the EU countries. The EU can point to the fact that Turkey fails to meet

the Copenhagen criteria in all areas, but there are also other possible reasons. One reason

may be the implications for the EU budget. Turkey's size, its large agricultural sector and

low income would make it the largest net recipient from the EU budget. A second reason

may be the power Turkey would get in EU decision-making by the sheer size of its

population. Turkey may well have a population larger than that of Germany by 2020 if

the present population trends continue. A third reason, and probably the most important

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of all, is the fact that Turkey is seen as foreign to Europe, what political scientists call the

Other of Europe (Müftüler-Bac, 1998).

The European identity is questioned on the grounds that less than five per cent of

Turkey’s population and territory are located in geographical Europe, and that Turkey has

a different culture. Several public statements have been made by prominent European

politicians to object to Turkish membership for these reasons. For example, the former

German Chancellor Helmut Schmidt has voiced his objection on religious grounds

(Kalaycioglu, 2002). Recently, the present chairman of the European Convention on the

Future of Europe and the former president of France, Giscard d’Estaing, said in an

interview that he objected to Turkish membership because Turkey had “a different

culture, a different approach, a different way of life” and because “its capital is not in

Europe, 95 % of its population is outside Europe, it is not a European country.”

Admitting Turkey would mean “the end of the European Union”, since it would set a

precedent for admitting Middle Eastern and North African countries, starting with

Morocco. The head of the government of Bavaria in Germany, Edmund Stoiber, has

argued that ”Europe cannot end on the Turkish-Iraqi border.” (International Herald

Tribune, November 9, 2002). In response to such sentiments one may add that Europe as

a set of values or as a region of shared history has no clear demarcation (Stråth, 1999). As

for shared history, the Ottoman Empire certainly was directly involved in the making of

war and peace in Europe for centuries.

4. Some basic descriptive statistics

Table 1 shows some basic data for the Turkish economy and makes a comparison with

other candidate countries and the EU.

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Agriculture

GNI, PPP, Per capita GNI (Current PPP, Value added, Employment, Export shares to

Population billion (Current percent of percent of Turkey EU (million) euro) billion euro) GDP Total Employment (%) (%)

Bulgaria 8.2 45 5,530 15.8 11.2 10.3 51.7 Czech Republic 10.3 140 13,610 3.4 5.3 0.6 68.8 Estonia 1.4 13 9,050 5.7 7.0 0.2 68.5 Hungary 10.0 121 12,060 3.9 7.2 0.7 75.2 Latvia 2.4 17 6,960 3.9 14.4 0.0 64.7 Lithuania 3.7 26 6,960 2.5 18.4 1.8 47.9 Poland 38.7 349 9,030 2.9 18.7 0.4 70.1 Romania 22.4 143 6,380 11.4 45.2 6.1 64.0 Slovak Republic 5.4 59 11,000 2.7 7.5 0.4 59.1 Slovenia 2.0 35 17,390 4.3 9.6 0.8 63.9

Total CEEC-10 104.5 948 9,068 5.1 21.5 2.0 67.6

Austria 8.1 213 26,310 1.2 6.1 0.7 61.4 Belgium 10.3 282 27,500 1.1 1.9 1.0 74.9 Denmark 5.3 145 27,120 2.0 3.7 0.4 67.3 Finland 5.2 128 24,610 0.9 6.2 1.3 55.3 France 58.9 1,440 24,470 2.3 4.2 1.1 61.4 Germany 82.2 2,054 25,010 0.9 2.6 1.4 56.5 Greece 10.6 179 16,940 6.8 17.0 5.1 43.6 Ireland 3.8 97 25,470 2.6 7.9 0.5 60.0 Italy 57.7 1,348 23,370 2.4 5.2 1.8 54.9 Luxembourg 0.4 20 45,420 0.6 2.4 0.5 84.0 Netherlands 15.9 417 26,170 2.2 3.3 0.8 78.8 Portugal 10.0 169 16,880 2.4 12.5 0.4 79.5 Spain 39.4 757 19,180 3.7 6.9 1.7 69.1 Sweden 8.9 211 23,770 0.7 2.9 1.2 55.0 United Kingdom 59.7 1,407 23,550 0.7 1.5 1.0 56.9

EU-15 376.3 8,865 23,557 1.7 4.3 1.2 62.1

Turkey 65.3 459 7,030 14.2 32.7 - 52.3

Source: The first three columns are from World Development Indicators Online, World Bank. Agricultural value added and agricultural employment data are from European Commission, Directorate General for Agriculture. Trade data are from IMF, Direction of Trade Statistics CD-ROM.

Table 1. Comparison between EU-15, CEEC-10 and Turkey, 2000

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The most important fact about Turkey is its size; in terms of population it would be the

second largest member of an enlarged EU. Moreover, the demographics are such that

Turkey is likely to surpass Germany and become the largest country in about 2020.

Turkey is among the poorest candidate countries, but is not quite as poor as Bulgaria and

Romania in terms of PPP-adjusted income per capita. It should be added that the income

disparities across Turkey are great, with the population in the southeast having less than

half the national average income and the large rural population generally being much

poorer than the urban population. Turkey’s relatively low level of development appears

in the share of the labor force in agriculture and value added. Only Bulgaria and Romania

have a similar dependence on agriculture.

In general, Turkey is not an important trading partner of the EU countries and the CEEC-

10, with the exception of Greece, Bulgaria and Romania. On the other hand, the EU is

Turkey’s most important trading partner, although Turkey’s exports are not as

concentrated to the EU as those of the CEEC-10.

The descriptive statistics suggest that the important economic effects of Turkish

accession should be related to its size, per capita income, and dependence on agriculture.

For the EU, these three factors combine to create a huge immigration potential, if

migration is let free. Moreover, they mean that Turkey may become the largest recipient

of transfers from the EU budget, at least under present rules and policies. For Turkey,

accession may result in important economic effects in the agricultural sector, given its

size and the fact that it would have to adjust to the Common Agricultural Policy.

5. Migration

The PPP-adjusted income per capita in the EU is more than three times higher than in

Turkey; it will probably take decades before Turkey attains an income level comparable

to that of the EU-15. The income differential will continue to be a strong incentive for

migration from Turkey to the EU. Turkish migration to Western Europe was particularly

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high in the 1960´s, but has remained a steady continuous flow, particularly to Germany

and, to a lesser extent, the Netherlands. A period of active recruitment of foreign labor in

many of the present EU countries in the 1950's and 1960's ended after the first oil crisis in

1973-74. Since then, immigration policies have become successively more restrictive,

and immigrants have mostly consisted of relatives of former immigrants, refugees and

asylum seekers. Most migrants from Turkey have ended up in Germany, which has a

population of Turkish origin of 2.1 million. The second largest recipient has been the

Netherlands, with 250 000 immigrants and their descendants from Turkey.

The prospect of large-scale immigration from Turkey and the other candidate countries is

a source of considerable concern among the EU-15, where it is feared that the immigrants

will depress wages, boost unemployment and cause social frictions and political

upheavals. Free migration will surely not be allowed immediately upon full membership.

In the case of the CEEC-8 entering in 2004, the present EU members can restrict

immigration from the new members for a period of seven years. The same transition

period was applied also when Greece, Portugal and Spain joined. One may therefore

safely assume that immigration from Turkey will be subject to restrictions for several

years.

Migration theory

The effects of migration from Turkey to any of the EU-15 member states can be

illustrated with the help of figure 1. The horizontal axis measures the total supply of labor

in Turkey and - say - Germany. At first, I will simplify and assume labor to be a

homogeneous factor of production. Later, I will take into account that labor is

differentiated by education, training and experience. The demand for labor by employers

in Turkey is shown by the demand curve DT. Likewise, the demand for labor in Germany

is shown by the demand curve DG. The total supply of labor in Germany and Turkey is

assumed to be fixed. Initially, it is divided so that the supply of labor in Turkey is

measured by the length of the line segment LTL0 and the supply of labor in Germany by

the length of the line segment LGL0. The supply of labor in each country is assumed to be

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inelastic. Before migration is allowed, the equilibrium wage in Germany is wG, which is

much higher than the equilibrium wage in Turkey, wT.

Figure 1. Effects of migration

When free migration is allowed, labor will move from Turkey to Germany in order to

earn the higher wage. Migration stops when the wage is equalized between the two

countries, at w, and L1L0 of the labor force has moved from Turkey to Germany. Thus,

one effect of migration is that it raises the wage in the sending country and reduces the

wage in the receiving country. Migrants as well as those remaining in Turkey gain, while

German workers lose. The effects for capital owners are the opposite; Turkish capital

owners now earn the surplus TwE instead of TwTC, while German capital owners earn

GwE instead of GwGA. (We assume that capital does not migrate in response to earnings

differences.) The fact that part of the labor force has moved from Turkey to Germany

wage

A

C

B

wage

LG

D

E

DT

LT

DG

wT

w w

wG

G

L1 L0

T

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also means a decline in Turkish GDP and a rise in German GDP. All these changes

amount to an increase in the combined social surplus or welfare. The increase is given by

the area ACE and it is captured by German capital owners and Turkish migrants. The

welfare increase is due to a more efficient allocation of labor; Turkish laborers become

more efficient when moved to Germany and the optimal allocation is achieved when the

marginal productivity of labor in Germany and Turkey is equalized.

Figure 1 provides a simplistic, yet powerful, analysis of the income, redistribution, output

and welfare effects of migration. It builds on the assumption that migration is entirely

driven by a wage differential and no unemployment exists. Unemployment can easily be

added to the model. Assume that before migration is allowed, L1L0 of the Turkish labor

force is unemployed. Those employed now earn a higher wage, w instead of wT. Assume

also that employment is decided by a daily lottery. Thus, the expected wage (the actual

wage w times the probability of winning employment) is lower than the actual wage and

lies somewhere between w and wT. The expected wage in Turkey is still below the certain

wage wG in Germany, so that labor will migrate to Germany once migration is allowed.

Assume that all the unemployed in Turkey migrate to Germany, but that employment will

remain unchanged in Germany, despite the inflow of migrants. Employment in Germany

is also decided by a daily lottery, where German and Turkish workers have equal

probabilities of winning. The expected wage therefore falls below w,G but not all the way

to w. Thus, in the new equilibrium, the actual and the expected wage are both higher in

Germany than the actual wage in Turkey. The expected wage can be higher in Germany

because workers attach a negative value to the risk of becoming unemployed and demand

a higher expected wage to compensate for the risk. The analysis here captures the idea

first expressed in a model of rural to urban migration in a developing country by Harris

and Todaro (1970).

It is seen that Turkish migration can serve both to depress wages in the receiving country

and to raise unemployment. Changes in the assumptions made, such as allowing

employment to increase in Germany or letting Turkish workers have a higher risk of

becoming unemployed, would not change the basic conclusions. One assumption in the

analysis is questionable, however, namely that labor is homogeneous. In reality, labor is

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highly differentiated according to education, training, experience and many other

characteristics. Thus, there are not only two factors of production, labor and capital, but

many types of labor and many types of capital. As soon as three factors or more, are

allowed for, the effects of migration on income distribution and social welfare become

less clear cut; see Borjas (1995). In general, the effects on native labor and capital

become more favorable when immigrants are complements rather than substitutes to the

native factors. For example, if the German labor force is skilled and the Turkish

immigrants are unskilled, then immigrants tend to increase the productivity and wages of

German workers. Likewise, the increase in social surplus from migration tends to rise, the

more complementary migrants and native workers are. In terms of figure 1, a smaller

substitutability between labor and capital means that the demand curves become steeper

and the size of the surplus triangles becomes greater (up to a point).

Naturally, the decision to migrate is not only dependent on relative wages and

unemployment, but also on many other factors. The early theoretical research focused on

income differentials and individual decisions, as in Berry and Soligo (1969). Recent

research stresses that migration is a household decision, and that social networks, culture,

language, geographical distance and other factors are also of importance. (For a survey,

see Ghatak et. al., 1996.)

Empirical research findings

Empirical research on immigration has largely focused on two questions (Borjas, 1994).

First, how do immigrants perform in the host country? Second, what is the impact on the

wages and employment of natives? Most of the research has been done on the United

States, and is therefore not fully relevant for Europe. In the past, immigration to the

United States has been of a more permanent nature than immigration in Europe, which

has an impact on the performance of immigrants. Furthermore, European labor markets

are generally considered to be more rigid than those in the United States, due to stronger

labor unions, more regulation and immigration policies.

The recent wave of immigration in the United States differs from past waves by the

markedly lower level of education of immigrants, compared to natives. Whereas earlier

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immigrants fairly soon reached similar income and employment levels as natives, later

immigrants have not. Moreover, there is a high correlation between first and second

generation immigrants in terms of educational attainment, and therefore a high

probability that also the second generation will fall behind (Borjas, 1994). These findings

for the United States may be applicable to Europe and, in particular, to immigration from

Turkey, which mostly consists of people from rural areas with low levels of education.

There is little evidence that immigration has a significant negative effect on the

employment opportunities of natives, either in the United States or in Europe. There is,

however, some evidence of small negative effects on the wage of unskilled labor in both .

On the other hand, a positive effect on the wage of skilled labor has been found in

Germany, as can be expected when unskilled immigrants are complements to skilled

native workers.2

A third question that has been the subject of some research and which has received much

attention from policy makers and the general public is whether immigrants are net

recipients or contributors to the public coffer. The problem with earlier studies is that

they focus on a single year, neglecting the cost and expenditures for an immigrant later in

life, such as pensions, and that they do not consider some general equilibrium

interactions, such as that between immigrants and an aging population. The studies by

Auerbach and Oreopoulos (1999) and Storesletten (2000) for the United States take a

dynamic, life-cycle approach with partial or general equilibrium interactions. They find

negative, but relatively small, fiscal effects of low-skilled immigration. Storesletten

estimates the average net present value of a representative low-skilled legal immigrant to

be -$36,000. A high-skilled immigrant, on the other hand, contributes $96,000 over her

life-time. A study of Germany by Bonin (2001) finds a significant positive effect of the

average immigrant over the life-cycle; a net immigration of 200,000 to Germany is

estimated to yield natives 200 euro per capita and year. The positive effect is due to the

average immigrant being of younger working age and thus being obliged to participate in

2 For the United States, see Friedberg and Hunt (1995), for Europe, see Zimmerman (1995), for Germany,see Haiskens-De New and Zimmerman (1996) and for Germany and Austria, see Winter-Ebmer andZimmerman (1998).

16

the repayment of existing government debt. The fiscal impact of immigration is bound to

differ between European countries, depending on the structure and level of taxes and

benefits.

The empirical research on the economic effects of immigration to Germany, host to the

largest immigrant population among the EU-15 and the largest population of Turkish

immigrants by far, seems to indicate fairly small and, on the whole, positive effects;

employment opportunities are not much affected, the wage of low skilled labor is

somewhat depressed but that of skilled labor is raised, and the net present value of public

transfers is positive. It is more difficult to evaluate the social costs and benefits of

immigration. There are many examples in urban Europe of failed absorption of

immigrants. Immigrant ghettos with high unemployment, criminality and social problems

loom large in the minds of the native population in many countries, although the

immediate costs are mostly born by the immigrants themselves.

Estimated model of migration to Germany from Southern Europe (Boeri and Brücker,

2000)

We have made a forecast of free Turkish migration to Germany, based on an estimated

model of immigration to Germany from the EU-15, Norway, Turkey, the United States

and former Yugoslavia by Boeri and Brücker and their co-authors in a report to the

European Commission (2000), henceforth BB. The choice of Germany is dictated by the

facts, first, that Germany holds the largest population of Turkish immigrants among the

EU-15 by far and can therefore be expected to attract the largest numbers of future

immigrants and, second, the paucity of data on migration flows and stocks before the

1990’s for most of the EU-15 countries.

BB estimated how the flow of migration depends on the wage differential, employment

rates in the home and host countries, the stock of migrants from the home country,

restrictions on migration and country specifics, such as language differences, distance

and institutions. The migration decision is seen as dependent on expectations about the

future wage differential based on present and past values of the differential, conditioned

17

by the individual probability of finding employment in the host country, relative to the

home country, which is assumed to be based on present and past average employment

rates, the ease of adjustment, proxied by the number of migrants in the host country, the

difference in development between the home and host country and language differences,

and agreements regulating migration, such as guest-worker agreements. Migration flows

are seen as short-run adjustments to a long-run equilibrium where migration has ceased

and the stock of migrants has attained an equilibrium level dependent on the wage

differential, the employment rate differential, restrictions on migration and country-

specific factors. The long-run equilibrium is also estimated, giving long-run relations

between the stock of migrants and the explanatory variables.3 The existence of a long-run

equilibrium builds on the assumption that the propensity to migrate has a certain

distribution over individuals in the home country; the equilibrium is reached when those

with the highest propensity have emigrated for given long-run values of the explanatory

variables and those remaining do not find emigration worthwhile.4

BB first estimate a (error-correction) model taking account of migration responses to

short-run deviations from long-run equilibrium relations. The signs of the coefficients on

the explanatory variables correspond to the signs found in the estimation. The equation

was estimated with data on migration to Germany from 18 industrialized countries during

the period 1967-1998:

(1) Change in migrant population in the receiving country/population of the sending

country = β1 (country-specific factors) + β2 (change in GDP per capita in the

sending country relative to the receiving country) + β3 (change in employment

in the receiving country) - β4 (change in employment in the sending country) +

3 Boeri and Brücker estimate an error-correction model. The assumptions and the model are described indetail in Boeri and Brücker (2000).4 A common approach to explain migration is to estimate a gravity equation. Yearly migration is explainedby wage and employment rate differentials, distance, language, regulation, the stock of earlier migrants inthe host country, i.e. much the same variables as in the present error-correction model. A problem with thisapproach is the long-run implication that the entire population will leave for a sufficiently large incomedifferential. The error-correction model tests for the existence of a long-run equilibrium where only a(small) part of the population has emigrated. Technically, it tests for co-integration between the variables.We have estimated a gravity equation of migration between Germany as the host country and Greece,Portugal and Spain as the home countries with disappointing results; most of the coefficients were

18

β5 (GDP per capita in the sending country relative to the receiving country in

the previous year) + β6 (employment in the receiving country in the previous

year) - β7 (employment in the sending country in the previous year) - β8

(migrant population/population of the sending country in the previous year) + β9

(dummy variable for free migration) + β10 (dummy variable for guest worker

agreement)

The long-run equilibrium relations between the ratio of the migrant population in the

receiving country relative to the population of the sending country on the one hand and

the explanatory variables on the other, can be found by setting the changes in equation (1)

equal to zero and estimating the resulting equation describing the long-run equilibrium

relations:

(2) Migrant population in the receiving country/population of the sending country =

(β1/ - β8) (country-specific factors) + (β2 /- β8) (GDP per capita in the sending

country relative to the receiving country) + (β6 /- β8) (employment in the

receiving country) - (β7 /- β8) (employment in the sending country) + (β9 /- β8)

(dummy variable for free migration) + (β10 /- β8) (dummy variable for guest

worker agreement)

The signs of the coefficients within parenthesis correspond to the estimated signs. As

expected, in the long run, the migrant population in the receiving country is positively

related to the income differential between the sending and the receiving country, the

employment rate in the receiving country, free migration and guest worker agreements,

and is negatively related to the employment rate in the sending country.

Forecast of migration from Turkey to Germany

We have used the BB estimation of equation (1) to forecast free migration from Turkey

to Germany from 2000 to 2030. To make a forecast, we must make assumptions about

population and GDP growth rates and employment rates for the whole period. For

insignificant or very small. Considering the time series data, it is clear that other factors not accounted for,

19

population growth, we have used the forecasts given by the World Bank in its World

Development Indicators database. For GDP, we simply assume a GDP growth rate for

Germany equal to the average for 1990-2000. The GDP and population growth rates yield

a GDP per capita growth rate of 1.7 per cent. For Turkey, we assume a higher GDP

growth rate. We make forecasts based on the assumption that every year, 1, 2 or 3 per

cent of the per capita income gap is closed. This means that GDP per capita in Turkey is

assumed to grow at (very high) 9, 12 or 15 per cent at the beginning of the period and at

about 3 per cent at the end. The average rate is about 5.5 per cent for the 2 per cent

assumption. The Turkish GDP and GDP per capita growth rates have been about 5 and 3

per cent, respectively, over the last five decades. Our assumption implies that GDP

growth must increase by about 2 percentage points for GDP per capita to grow at 5.5 per

cent.

The results of the forecast are shown in figure 2. As can be seen, the Turkish immigrant

population starts out at about 2.2 million in 2000 and reaches about 3.5 million in 2030

under the assumption that no restrictions are placed on migration.

such as political developments, played a major role.

20

Figure 2. Forecast of the Turkish immigrant population in Germany

2

2.5

3

3.5

4

2000 2010 2020 2030

Million

Year

1%2%3%

Note: Forecasts for a 1, 2 and 3 % convergence rate of per capita income between Germany and Turkey.

Source: Own calculation based on Boeri and Brücker (2000).

It must be stressed that this forecast is highly uncertain. It depends on the specification of

the migration model, the estimates of the model which, in themselves, are uncertain, and

heroic assumptions about GDP and population growth rates. Furthermore, we assume that

estimates made for a group of countries in a certain time period in the past can be applied

to a different country pair and a different time period. Finally, the forecast assumes that

the Turkish migrant population in Germany is far from its equilibrium value (which is to

say that our estimated fixed effects for Turkey in equation (1) are crucial for the forecast).

Ideally, we would like to have forecasts of Turkish migration to all EU-15 countries.

Lack of data makes it impossible to estimate an equation such as equation (1) for more

than one or two countries. However, Germany is the most important country of

immigration from Turkey by far, and it would dominate any estimate of immigration to

the whole of EU.

21

6. Agriculture

Agriculture is an important part of the Turkish economy. Its contribution to GDP is about

14 per cent and its share of employment 33 per cent. The corresponding figures for EU-

15 are 1.5 and 4.8 per cent, respectively. Turkey employs about the same number of

people in agriculture as the EU-15 but the size of its area of cultivation is only one third .

Until recently, agricultural support has placed a large burden on Turkish taxpayers.

Transfers to farmers have amounted to about 5 per cent of GDP and the total support to

agriculture, including the higher prices paid by consumers, has been estimated at 8 per

cent of GDP. The share of agriculture in GDP and employment and the extent of transfers

to agriculture indicate that accession can have important social, distributional and

political effects in Turkey. Accession means that Turkey would have to adopt the

Common Agricultural Policy and would receive agricultural subsidies. At the same time,

the size of the Turkish agricultural sector threatens to be costly for EU taxpayers if

Turkish farmers are to have the same terms as the farmers of the CCEC-8. The latter will

receive 25 per cent of the full level of income support when they join in 2004, to be

increased by 5 percentage points in 2005 and 2006, when the present EU budget period

ends. The Commission has proposed that direct payments continue to be gradually

increased so that the new members reach the full level in 2013. However, it is unlikely

that the CAP will remain unchanged in view of the increased financial burden

enlargement would entail.

Turkish agricultural policy

Turkey is in the process of abandoning its system of input subsidies and output price

supports in favor of a system of direct income support, as in the Common Agricultural

Policy (CAP) of the EU. If the reforms are fully implemented, the consequences will

potentially be great for Turkish farmers, at least in the absence of compensating CAP

financing. Until now, Turkish policy has consisted of guaranteed output prices, input

subsidies, some limited control of supply, free or low cost services to farmers, import

protection and export subsidies. The CAP is moving towards world market prices and

22

maintaining farmers´ incomes through direct payments tied to acreage and livestock

holdings instead of guaranteeing high prices for agricultural products.

Price support has been the most important part of Turkish agricultural policy. State

economic enterprises and agricultural sales cooperatives have been commissioned to buy

cereals, tobacco, tea and sugar beet from farmers at prices determined by the government.

These higher than world market prices have been protected by import tariffs. The second

most important component of the policy has consisted of various subsidies, grants and

exemptions with the purpose of reducing the cost of inputs, including capital, fertilizer,

seed, pesticides and water. The output of tobacco, hazelnuts, tea and sugar beet has been

controlled in various ways. Services to farmers, e.g. research, training, extension and

inspection services were provided free or at a low cost.

Turkey has granted very few preferential tariffs on agricultural imports from the EU. On

the other hand, the EU has granted imports from Turkey a highly preferential treatment.

A considerable part of the agricultural imports enters the EU without duties. Import

barriers mostly exist in the form of tariff-quota schemes, where imports within the quota

are free from tariffs, and an entry price scheme, where specific duties are applied if the

value of the consignment falls below the entry price. It is estimated that about 70 per cent

of the imports from Turkey enter the EU duty free and without any other import barriers.

However, high specific duties are applied to the core products of the CAP: cereals and

processed cereals, sugar and sugar products, dairy products and meat. Olive oil is also

highly protected. Turkish exports of vegetables and fruits receive export subsidies.

The present agricultural reforms in Turkey are a result of the Uruguay Round agreement

on agricultural trade and Turkey’s own efforts to adjust to the CAP. The reforms are also,

to some extent, prompted by an agreement with the IMF in 1999 to reform agricultural

policy - that is, to make it less costly - as a condition for IMF support. Under the reform

program, output price supports and input subsidies and grants in various forms will be

phased out and replaced by direct payments to farmers based on land holding, and tariffs

will gradually be reduced. Income support is capped at 20 hectares and it is estimated that

the total support will cost in excess of 2 billion euros. The reforms are being implemented

23

at present and are planned to be completed in two years time. Privatization of state

enterprises in the agricultural sector is also part of the program.

If the reforms are brought to completion, Turkey will have an agricultural policy similar

to the CAP; high intervention prices and protection from the world market have been

replaced by direct income support, lower protection and prices approaching world market

prices. Implementing the program requires extensive administrative reforms. For

example, substantial investments are needed in improving land registration, collecting

agricultural data, and raising the veterinary and plant sanitary standards.

Effects of policy changes

The present agricultural policy reform of the EU covers the period 2000-2006, while the

implementation of the Turkish program started in 2000. We can safely assume that the

date for Turkish accession lies beyond 2006 and presume that both sets of reforms will

have been implemented at the time of accession. The consequences for the EU of

admitting Turkey are mainly related to financing the CAP and rural development in

general.

For Turkey, the benchmark is different. The Turkish reforms can be seen as a

consequence of accession (as well as the need to reduce public expenditure). In the short

run, they will lead to a substantial reduction in farmers’ incomes. Lower administered

prices and the elimination of input subsidies are far from compensated by direct income

support. It is estimated that the total support - measured per hectare of land under

cultivation - will decline from USD 295 per hectare to USD 68, including direct income

supports (averages for 1997-99; OECD, 2000). Although this represents a large

reduction, it is fairly small in relation to total farm income. In terms of the value of

agricultural output, the total support was estimated at 13 per cent in 2000, which should

be compared to the EU average of 38 per cent in 2000 (OECD, 2001). The present price

reductions in Turkey will not reduce prices to the new CAP levels. Disregarding any

direct income compensations, the adoption of the CAP would therefore lead to further

income reductions. However, we also need to consider CAP subsidies to Turkish farmers.

These subsidies are largely, but not entirely, independent of the income level of the

24

recipient country. If Turkey were to fully benefit from CAP subsidies, its farmers would

be able to raise their income above the level after the present reforms given that the total

support per hectare is much higher in the EU, or an annual average of USD 845 in 1997-

99 (60 per cent of which consist of transfers from taxpayers; OECD, 2000). In other

words, accession is likely to provide a gain for Turkish farmers, certainly in relation to

the situation after the present reforms and probably also the situation before the reforms.

The consequences for agricultural production and trade of adopting the CAP, including

free trade with the EU, are less clear. The fact that prices in Turkey are generally higher

than in the EU indicates that agricultural production will contract and the trade position

with the EU deteriorate. Turkey had a agricultural trade surplus of about EUR 1.3 billion

with the EU in 1999. Most of this was in fruits, vegetables and tobacco, which can

already enter the EU practically free of charge. The effects of a customs union in

agricultural products between the EU and Turkey will therefore be small for Turkey’s

main export items. Vegetables, fruits and tobacco have a higher tariff protection from

third countries in Turkey than in the EU; adopting the EU tariff rates may therefore

induce some competition from imports.

7. The EU budgetary effects of accepting Turkey today5

The structure of the present system of EU revenue and expenditure is such that rich

member states transfer resources to poor members, but the relation between income per

capita and net transfer is far from straightforward. Some rich countries give

proportionately more than others, while some poor countries receive a disproportionate

share of the transfer. Turkey and the CEEC-10 are all poor relative to the EU 15. Much

attention has therefore been given to the budgetary effects for the EU of enlargement on

the assumption that it will be very costly for the EU 15. The present net recipients from

the EU budget have feared that they will be the ones to bear a disproportionate share of

the cost and the net contributors that they will be required to raise their contributions.

5 This section draws on the corresponding discussion in Baldwin et al (1997).

25

The major items on the revenue and expenditure sides of the budget in 2002 are shown in

table 2.

Table 2. The EU budget in 2002

Revenues ExpenditureMillion euro Share Million euro Share

Duties and levies 15 267 17.3 Agriculture 40 506 48.6VAT 35 193 40.0 Structural Operations 27 591 33.1GNP 37 580 42.7 Internal policies 5 361 6.4Correction* -71 External expenditure 5 231 6.3Total 87 969 100.0 AdministrativeOther revenue** 4 755 expenditure 4 643 5.6Total 92 724 Total 83 331 100.0

Notes: *Does not add to zero due to exchange rate differences. **Interest, surplus from previousyears, fines, taxes on salaries of employees of European institutions, etc.

Source: European Commission, Allocation of 2000 EU operating expenditure by Member State,tables 5a and b.

Revenues are collected from three sources: member states’ VAT revenues, customs

duties collected by member states and a tax related to member states’ GNP. The total

contribution to the EU budget is, by decision, capped at an annual amount equal to 1.27

per cent of GNP until 2006, when the present long-term budget ends.

Expenditures have two main destinations: the CAP and the so-called Structural

Operations aimed at disadvantaged countries and regions. Until recently, the CAP has

built on price supports. Prices on many agricultural products are kept above world market

prices by the buying up of excess supplies at administratively determined minimum

prices and by protecting EU markets from low world market prices by duties on imports.

Excess supplies are disposed of at a loss in the EU and on the world market. Starting in

1993, the CAP has gradually shifted away from price to income support. Prices in the EU

are reduced towards world market prices and farmers are compensated by direct income

payments, based on their holdings of land and animals. The CAP favors farmers and the

26

main agricultural products of the original EU-6, namely grains, sugar beet, dairy products

and beef. Fruits, vegetables, poultry and pork, important products of the newer, southern

members, receive less or no support.

Structural Operations are based on criteria of underdevelopment and structural

disadvantages of particular regions and countries. Regional support is given by the so-

called Structural Funds. For example, to be eligible for support under the classification of

Objective 1, a region must have a per capita income of less than 75 per cent of the EU

average. About 55 per cent of the Structural Operations expenditure fall under this

classification. By construction, the Cohesion Fund is exclusively directed at Greece,

Ireland, Portugal and Spain. Cohesion Fund expenditure is modest, or about 2 per cent of

the total budget, but it is important for the recipient countries.

One way of calculating Turkey’s contributions to and receipts from the EU budget would

be to estimate the "tax base", i.e. VAT and tariff revenue and GNP, and the extent to

which Turkish agriculture and regions are eligible for support from the CAP, Structural

Funds and the Cohesion Fund. The calculation is likely to come up with a large net

transfer to Turkey, both because of the size of the agricultural sector and because Turkey

is poor relative to the EU-15. We find it unlikely that the EU-15 will accept Turkey as a

member if this proves to be very costly. Turkish accession will come after the accession

of the CEEC-10, Cyprus and Malta. These countries are also poor - with the exception of

Cyprus - and have relatively large agricultural sectors. When the EU-15 determine new

rules for contributions to and receipts from the budget, they will consider the budgetary

effects of a future EU-28. Since the EU-15 will be relatively large net contributors after

enlargement under the present rules, they will, we argue, want to change the rules in

order to reduce the amount of redistribution from rich to poor member states. Their

ability to do so before the enlargement is actually considerable. The question is what will

happen once the enlargement has taken place?

The history of past enlargements shows that rules are changed if an acceding country

becomes a disproportionately large net contributor or is a disadvantaged recipient of CAP

or Structural Funds support under the existing rules. The United Kingdom has a relatively

27

small agricultural sector and receives modest CAP support. After a long struggle, it won a

permanent rebate - a "correction of budgetary imbalances" - on its contribution. Portugal

and Spain also receive modest CAP funding since their agriculture produces relatively

little grains. After their accession, it was decided to limit the aggregate CAP spending in

favor of Structural Funds spending, which benefited Portugal and Spain. The Cohesion

Fund set up in 1993 - ostensibly to help the poor members cope with EMU - can also be

seen as a compensation to Greece, Ireland, Portugal and Spain. Austria, Finland and

Sweden do not have poor regions eligible for much support from Structural Funds.

Objective 6 (later included in Objective 1) was created as a compensation.

The rules for contributions to and receipts from the EU budget favor poor countries, since

contributions are more or less proportional to income per capita, while Structural

Operations are targeted at poor countries and regions to raise their income relative to

richer countries and regions. CAP has a bias towards temperate climates and therefore,

the richer members, but not enough to overturn the re-distributive effects of Structural

Operations. In the final instance, the rules in a future EU-28 will depend on the voting

power of the new members and the voting rules.

The present rules give small countries more voting power per capita than large countries.

Consider the extremes: Germany with a population of 83 million has 10 votes in the

Council of Ministers while Luxembourg with a population of 400 000 has 2, giving

voters in Luxembourg 42 times the voting power of voters in Germany. Most of the

candidate countries are relatively small. The largest are Turkey, with 65 million, Poland,

38 million, and Romania, 23 million. Overall, poor countries will have more votes in the

EU-28 than in the EU-15. At present, there are 87 votes in the Council. Under the

existing rules, decisions must be either unanimous or made with a qualified majority of

62 votes, or 71 per cent. Under the new rules agreed on at the European Council meeting

in Nice, 74 per cent of the votes will be required for a qualified majority, starting in 2005.

The 13 candidate countries would add as many as 53 votes to the Council, based on the

present allocation of votes according to population size.6 Turkey should receive 10 votes,

6 The Nice Treaty set the number of votes in the Council to 348, once the EU-27 has been established. Thenew distribution of votes per member state is more differentiated with respect to population size than the

28

the same number as France, Germany, Italy and the United Kingdom each. Thus, a

coalition of poor, new member states can easily block decision-making in the EU-28.

Voting power should therefore be a good indicator of how much a country receives from

the EU in the form of CAP and Structural Operations support. The history of enlargement

has shown that if new members feel disadvantaged under the existing rules, they will

change the rules and eligibility criteria to achieve a more favorable outcome. At the same

time, GNP per capita is a good indicator of how much a country has to contribute to the

EU budget. An alternative way of calculating the budgetary effects for new members is

therefore to estimate the contribution per capita in the EU-15 based on income per capita,

and estimate the receipts per capita based on per capita Council votes and the level of

development in a broader sense, as indicated by eligibility for Cohesion Fund status.7 The

results of such an estimation are shown in table 3.

Table 3. Estimates of contributions/receipts equations

Receiptsper capita

Contributions percapita

GNP per capita 0.008(0.00)

Votes per capita 19.3(0.067)

Cohesion dummy* 629.9(0.00)

Adj. R2 0.86 0.78No. obs. 30 15

Notes: P-values in parenthesis. Receipts per capita on data for 1999 and 2000, contributionsper capita on data for 2000. *Interacted with votes per capita.

Source: European Commission, Allocation of 2000 EU operating expenditure by MemberState, various tables, 2001.

present distribution, but the voting power distribution is still very regressive, with Malta receiving 22 timesmore voting power per citizen than Germany.7 This approach was taken in Baldwin et al (1997).

29

As can be seen, GNP per capita alone can explain 78 per cent of the variation in

contributions per capita among the EU-15. The estimated effect is highly significant. As

for receipts per capita, the number of votes per capita and Cohesion Fund status can

explain as much as 86 per cent of the variation in the data. The effect of voting power is

borderline significant (it is significant at the 10 per cent but not at the 5 per cent

confidence level), while the effect of Cohesion Status is highly significant.

The estimates of table 3 were then used to estimate the contributions and receipts of each

of the candidate countries. It must be remembered that these estimates are based on the

present distribution of votes among the EU-15 and the present rules for contributions and

receipts.

Table 4. Estimated contributions and receipts for candidate countries

Population GDP Assumed Cohesion Contribution Total Receipts Totalmillion million votes status per capita, contribution, per capita, receipts,

euro euro million euro euro million euroPoland 38.7 174 8 1 90 3472 297 11505Romania 22.4 39 6 1 67 1499 337 7544Czech Republic 10.3 55 5 1 96 992 477 4917Hungary 10.0 49 5 1 93 930 487 4868Bulgaria 8.2 13 4 1 65 536 479 3927Slovak Republic 5.4 21 3 1 84 453 523 2823Lithuania 3.7 12 3 1 79 293 688 2544Latvia 2.4 8 3 1 79 190 971 2331Slovenia 2.0 19 3 1 133 266 1133 2266Estonia 1.4 5 3 1 84 118 1548 2168Cyprus 0.8 10 2 0 159 128 212 170Malta 0.4 4 2 1 133 53 3394 1358Turkey 65.3 215 10 1 80 5200 263 17152

Total 14130 63572

Source: World Bank, World Development Report, 2001 and ownestimates.

30

The total net transfer to the 13 countries is quite large, 49 billion euro, which is

equivalent to more than half of the present budget of the EU-15. Turkey would receive a

net transfer of about 10 billion euro, and Poland a net of about 8 billion. The smaller

countries receive net transfers that are much larger per capita than the larger countries,

due to their greater voting power. The extreme cases are Malta and Turkey, with net

transfers of 3 400 and 263 euro per capita, respectively. The distribution of votes that we

have assumed is, of course, somewhat uncertain, as is the assumed eligibility for

Cohesion Fund support. We have assumed that all countries except Cyprus qualify

because their per capita income would be less than 75 per cent of the EU-28 average. A

less generous assignment of Cohesion Fund status would generate substantially lower net

transfers.

It is clear that the accession of all candidate countries requires substantial changes in the

EU budget. There are numerous alternatives. The gross contribution should be increased

to allow much larger net transfers between Member States. Another alternative is to

drastically reduce the amount of redistribution, which must be achieved by a reduction in

Structural Operations, since these are re-distributive to a greater extent than CAP

financing.

It seems clear that accepting the CEEC-10, Malta, Cyprus and Turkey will be costly for

the EU-15 countries. In particular, some countries that are now net recipients may

become net contributors. Is that acceptable to them? Such prospects might explain the

less than enthusiastic endorsement of enlargement among the recipient countries of

Cohesion Fund financing, in particular Greece, Portugal and Spain.

8. The trade potential

Turkey was a fairly closed economy until the early 1980’s. At that time, and as part of

more wide-ranging economic reforms, the policy of protection and import substitution

was replaced by a much more open trade regime. The result was a rapid increase in trade;

the ratio of the average of exports and imports to GDP increased from 0.09 in 1980 to

31

Source: Calculations by S. Togan

There is a striking deficit in the balance of trade in goods of 14 billion dollars overall and

7 billion with the EU. However, the numbers in table 5 do not include substantial transit

and shuttle trade. Shuttle trade includes trade carried out by people from parts of the

former Soviet Union, who travel to Turkey to fill large suitcases with various goods to

bring back. The transit and shuttle trade is estimated to generate 3-4 billion dollars in net

exports. The deficit in goods trade is also balanced by a surplus in tourism services. In

fact, tourism is the single largest export item, with export revenues of about 7 billion in

1999.

0.25 by 1999. Turkey’s pattern of trade in goods is shown in table 5.

Table 5. Turkey’s commodity trade pattern, 1999

PercentExportshare

Share ofexports to

EU

Importshare

Share ofimportsfrom EU

Agricultural products 17 14 9 5Food 16 13 5 2Agricultural raw materials 1 1 4 3

Mining products 4 4 17 4Ores and other minerals 2 2 2 1Fuels 1 1 13 2Non-ferrous metals 1 1 2 1

Manufactures 79 82 74 91Iron and steel 6 4 4 3Chemicals 4 2 15 19Other semi-manufactures 8 7 5 7Machinery and transport equipment 19 21 38 50Textiles 13 13 5 4Clothing 25 32 1 1Other consumer goods 4 3 6 7

Total value, million euro 28 847 15 568 44 145 23 236

32

Table 5 shows that Turkey has a comparative advantage in agricultural goods, primarily

fruits and vegetables, iron, steel, textiles and clothing, that is, in resource and labor

intensive goods, and a comparative disadvantage in physical and human capital intensive

goods, as revealed by large net imports of more sophisticated manufactures.

When considering whether full membership is likely to change the pattern and volume of

trade between the EU-15 and Turkey, it is important to keep in mind that the customs

union in industrial goods was established in 1996, and that a period of at least ten years of

free trade would precede full membership. The difference between a customs union in

industrial goods and being part of the Single Market is free trade in agricultural goods

and services, and free mobility of capital and labor - after some transitional period. Thus,

no significant effects of membership on the trade pattern in industrial goods should be

expected. Trade in agricultural goods will be affected, but the major effects will be in

Turkey, not in the EU-15, since the import barriers are already relatively low for Turkish

agricultural exports.

For some decades to come, Turkey’s comparative advantage will be in low-skill, low

wage activities in manufacturing. Compared to the CEEC-10, Turkey is probably

significantly less endowed with human capital because of a generally much lower level of

secondary and higher education. The average level of schooling for an adult is 4-5 years.

Only recently did Turkey raise the mandatory minimum length of schooling from five to

eight years.

Although the pattern of Turkish - EU trade is not expected to change substantially as a

result of full membership, there is considerable potential for an increase in the volume of

trade. The CEEC-10 have experienced substantial increases in trade volumes as a result

of large investments by firms from Western Europe and elsewhere, which combine their

technical, managerial and marketing assets with a generally well-educated and skilled

labor force at low wages. Turkey has a long way to go before it can hope to attract

foreign direct investment to the same extent as some of the more successful countries in

Central and Eastern Europe. For example, Turkey attracted 15 dollars in foreign direct

investment per capita in 2000 compared to 256 dollars in the case of Poland, the most

33

successful of the CEEC. Foreign direct investment in Turkey is hampered by political

uncertainty, bureaucracy, detailed regulation and – by rumor – corruption. Turkey has

one of the lowest rankings in terms of foreign direct investment potential and

performance according to UNCTAD (2002). Membership and adoption of the acquis will

go some way towards establishing a better investment climate which, in turn, should lead

to higher volumes of trade in the same way as for the CEEC-10.

We have made a forecast of the volume of trade between Turkey and the EU-15 under the

assumption that trade will reach the same level of intensity as trade between the EU

member states at present. The forecast is based on estimations of a so-called gravity

equation for trade within the EU-15. The gravity equation has been used to explain the

bilateral trade volume since the 1960’s, and has proven to be remarkably successful. It

postulates that the volume of trade between a pair of countries is typically a function of

the size of the trade partners, measured by GDP, population or geographic area, their

income levels or capital abundance, measured by GDP per capita, and of trade costs,

measured by a variety of factors, such as tariffs and other administratively imposed trade

barriers, geographic distance, common borders, common language or common legal

systems.8

We have estimated the following standard version of the gravity equation:

log [(exports from country i to country j + exports from country j to country i)/2] =

= constant + β1 log (GDP of country i x GDP of country j) + β2 log (GDP per

capita in country i x GDP per capita in country j)

+ β3 log geographical distance + dummy for common land border

+ error term

8 Standard versions of the gravity equation can be derived from all three basic trade models, i.e. theRicardian, Heckscher-Ohlin and increasing returns to scale models, as well as from other models, asdemonstrated by Anderson (1979), Bergstrand (1990), Deardorff (1998), and Helpman (1998). Recentresearch has sought to ascertain to what extent the various models contribute to the empirical success of thegravity equation and thereby to evaluate their empirical relevance, see Feenstra, Markusen and Rose (1999)and Evenett and Keller (2002). A tentative conclusion is that models based on increasing returns andproduct differentiation are more successful in explaining intra-industry trade, while trade in homogeneousgoods is better explained by differences in factor endowment or differentiation of goods by country oforigin (Armington assumption).

34

The dependent variable in the gravity equation is the logarithmic average of bilateral

exports. It is explained by the logarithmic product of GDP; the volume of trade is simply

assumed to rise in proportion to the combined economic size of the trade partners. GDP

per capita can be considered as a measure of product differentiation and specialization.

The higher the per capita income is, the more differentiated are taste and production, and

the larger is the volume of trade based on product differentiation and increasing returns to

scale. A high per capita income is also an indication of abundance of physical and human

capital relative to manual labor. Thus, the per capita variable should serve to capture both

intra-industry trade caused by product differentiation and increasing returns to scale, and

inter-industry trade caused by differences in factor endowments. Trade costs are

controlled for by the inclusion of geographical distance and a common land border.

Geographical distance is an indicator of transportation costs, but also of the costs of

cultural differences which tend to increase with geographic distance. Finally, a common

land border is considered to have a level effect on the volume of trade.

The estimates of the gravity equation are presented in table 6. Two estimation methods

were used, OLS and random-effects GLS, which yield similar estimates. The gravity

equation explains more than 90 per cent of the variation in the data. All coefficients are

estimated with a very high level of statistical significance (less than 1 %) and have the

expected sign, with one exception. The product of real per capita GDP is found to have

an unexpected, negative effect on the volume of trade, when distance is controlled for.

However, the coefficient changes signs and becomes positive and highly significant when

distance is omitted from the regression, as in the second column. Clearly, the results

indicate the income differentials between present EU members and distance to be

positively correlated (the correlation between the log of the product of per capital GDP

and distance is - 0.51).

35

Table 6. Pooled panel gravity estimates for intra-EU-15 trade

OLS (1) OLS (2) Random-effects GLS

0.8577 0.8818 0.8031Log real product GDP(0.0098) (0.0120) (0.0266)-0.2802 0.2439 -0.3722Log real product GDP per

capita (0.0362) (0.0384) (0.0342)-0.8819 - -0.9374Log distance

(0.0326) - (0.0948)0.4000 1.2557 0.4174Common border

(0.0516) (0.0673) (0.1780)R2: Within - - 0.3897R2: Between - - 0.9275R2: Overall 0.9249 0.8797 0.9227

Notes: GDP and Population data from OECD Economic Outlook No.70 (Dec. 2001). Trade data from OECDMonthly Statistics of International Trade CD-ROM (June 2001) and great circle distances between capitals fromthe website http://www.wcrl.ars.usda.gov/cec/java/lat-long.htm. 1155 observations, annual data for 15countries, 1990-2000. Intercept and year controls not recorded. Standard errors within parenthesis. All estimatessignificant at less than 1%.

The OLS estimates of the gravity equation in the first column were then used to make

forecasts of the bilateral trade of each of the CEEC-10 and Turkey with the EU-15. The

results are presented in table 7. As can be seen, the forecasted value of Turkish - EU-15

trade is 26.1 billion dollars in 2000, which is almost fifty per cent higher than the actual

value of 18 billion. Most of the CEEC-10 are also projected to increase their trade with

the EU-15, some of them considerably more than Turkey, while two countries - Estonia

and Hungary - actually have higher actual than projected trade. Note, however, that the

point estimates obtained with our forecast method are highly uncertain as shown by the

95 per cent confidence intervals for the point estimates.

36

Table 7. Forecast of trade with EU-15

95% conf. interval

CountryForecast, million

euro, 2000Lowerbound

Upperbound

Forecast/Actual trade,2000

Bulgaria 4.4 1.6 12.3 1.82Czech Republic 24.4 9.0 65.3 1.29Estonia 1.8 0.7 5.1 0.69Hungary 15.0 5.5 40.4 0.80Lithuania 3.5 1.3 9.4 1.82Latvia 2.5 1.0 6.7 1.59Poland 42.0 15.6 112.8 1.75Romania 10.4 3.9 28.4 1.63Slovak Republic 11.1 4.1 30.4 2.02Slovenia 7.3 2.7 19.5 1.26

Turkey 28.3 10.5 76.3 1.46

Source: GDP and population data from World Development Indicators On-line (World Bank). Trade datafrom OECD Monthly Statistics of International Trade CD-ROM (June 2001) and great circle distancesbetween capitals from the website http://www.wcrl.ars.usda.gov/cec/java/lat-long.htm

Macroeconomic instability

Macroeconomic developments in Turkey since the 1950's are characterized by booms and

busts: periods of high growth are interrupted by periods of balance of payments crisis,

high inflation, low or negative growth, and political unrest. Nevertheless, the average rate

of growth has been quite high, 5-6 per cent. The latest economic crisis, which erupted in

1999, has forced the government to embark on a number of reforms that were, in part,

conditions for IMF support and in part prompted by Turkey's new status as a candidate

for membership in the EU. Greater macroeconomic stability and lower inflation must be

achieved for Turkey to meet the Copenhagen economic criteria.

A brief look at Turkish macroeconomic history in the past 50 years helps us understand

the recent crisis and reforms.9 In the 1950's, state economic enterprises had a fifty per

9 The following account for the period 1950-1987 is largely taken from Önis and Riedel (1993).

37

cent share of the value-added in manufacturing, a virtual monopoly in other sectors and

they were the instruments through which the government supported agriculture. State

economic enterprises could borrow directly from the Central Bank. Increased demand for

credit led to a rapid appreciation of the currency, almost squeezing exports to extinction.

At the same time, imports were reduced to a minimum by import quotas. The government

was forced to adopt a stabilization program in 1958, including devaluation and fiscal

consolidation. The program gave rise to public unrest, and a military government seized

power in 1960. The military regime had a strong belief in central planning of the

economy and amended the constitution to include a state planning organization. It also

embarked on a policy of import substitution. The 1960´s were economically successful,

with a stable growth rate and only 5 per cent inflation. However, the rate of inflation was

sufficiently high to cause a steady appreciation of the exchange rate, which finally forced

the government to devalue by 66 per cent in 1970. This caused political unrest and

violence, and the military - which is charged with guarding national stability in the

constitution - again forced the civilian government to resign. Spurred by easy foreign

credit and large remittances from workers abroad, the economy grew at a rapid pace

during much of the 1970's. But by 1977, the foreign banks had become worried about the

rapidly growing foreign debt and stopped lending. Aggregate growth ceased and

industrial production contracted during the next three years, while inflation accelerated.

The 1970´s was a period of great political instability in Turkey, with a succession of

civilian governments and finally, a new a military takeover in 1980. The military

government implemented a stabilization and reform program, including a 70 per cent

devaluation, anti-inflationary measures, and less emphasis on state enterprises. It

managed to stabilize public finances, reduce inflation from more than 100 to about 30 per

cent and revive economic growth. The perhaps most important economic achievements

were a switch from the protectionist, import-substitution policy towards much liberalized

trade and steps to deregulate and privatize. In the 1990's, Turkey developed serious

problems in its public finances, which caused a crisis, fiscal stabilization and negative

growth in 1994. However, the public finances deteriorated and a new fiscal crisis

emerged already in 1998-99, when the IMF was called in and a program of fiscal

stabilization and structural reforms was introduced. The new program seemed to be going

38

well when a banking crisis erupted in late 2000 and again at the beginning of 2001. The

crisis years of 1994, 1999 and 2001 are characterized by a sizable fall in GDP in the order

of 6 per cent, while growth in the interceding years has reached up to 8 per cent.

Devastating earthquakes made the fiscal and economic crisis in 1999 worse.

It is clear that the Turkish macro economy has been quite unstable in the past, and that

most of the shocks have been domestic. But has the macroeconomic instability been

worse than that of some present EU countries? We have compared the business cycle of

Turkey, as measured by monthly data on industrial production, with those of Greece,

Portugal and Spain. The upward trend in the data has been eliminated by statistical

techniques to bring out the variations more clearly. We have also made a comparison

with the common component of the business cycles of the EU-9 countries, and of

Canada, Japan and the United States, respectively. 10 The comparison with the regional

business cycles may give us some idea of whether the business cycles of the four

individual countries have been driven by external business cycles. 11 The estimation is

done for a sufficiently long time period to allow us to investigate whether accession

changed the pattern observed for Greece, Portugal and Spain. It is sometimes argued that

the close economic integration afforded by EU membership makes the business cycles of

new entrants more synchronized, see e.g. Frenkel and Rose (1997).

10 We have used a method suggested by Lumsdaine and Prasad (1999) and also used by Bergman (2000,2001). One advantage of this method is that the decomposition between a country-specific and a commonbusiness cycle component is independent of underlying assumptions about the relation between thecomponents. Moreover, the weights assigned to different countries when calculating the commoncomponent can vary over time. Other methods require identifying restrictions or assumptions about thebehavior of the common component, see Bergman (2000).11 A number of studies of macroeconomic symmetry in Europe have identified a core with a fairly largedegree of symmetry consisting of Austria, Belgium, Denmark, France, Germany, Luxembourg andNetherlands. For the rest of the EU-9, Ireland and the United Kingdom are usually found to be quiteasymmetric, while Italy falls in between. See the references in Bergman (2000).

39

Figure 3. Business cycles, 1978-1998

Note: De-trended time series.

Sources: IMF, OECD (Portugal) and Turkish statistical office

-0.15

-0.10

-0.05

0.00

0.05

0.10

78 80 82 84 86 88 90 92 94 96 98

-0.15

-0.10

-0.05

0.00

0.05

0.10

78 80 82 84 86 88 90 92 94 96 98

-0.15

-0.10

-0.05

0.00

0.05

0.10

78 80 82 84 86 88 90 92 94 96 98

-0.15

-0.10

-0.05

0.00

0.05

0.10

78 80 82 84 86 88 90 92 94 96 98

Turkey Greece

Portugal Spain

Country i Canada + Japan + U.S. EU

40

The panels in figure 3 show the fluctuations in industrial production for Turkey, Greece,

Portugal and Spain, together with the common component of the corresponding

fluctuations in EU-9 and Canada-Japan-United States.12 Several features are noteworthy.

First, we cannot see that the volatility of the cycle has decreased after accession in 1986

in the cases of Portugal and Spain, whereas a dampening can be seen for Greece. Second,

Portugal and Greece display much greater volatility than Turkey and, in particular, Spain.

Third, the Spanish cycle is synchronized with that of EU-9 and Canada-Japan-United

States, especially during the 1990´s, while the cycles of the other countries are not. It

seems that the Turkish business cycle is both volatile and asymmetric with respect to the

international economy - as could be expected, given its relatively small degree of

openness - but it is not more volatile than the Portuguese cycle and does not seem more

asymmetric than the Greek and Portuguese cycles.13 14

The political economy of public finances

Will Turkey continue to experience periodic macroeconomic crises, as in the past, and

will inflation remain high, around 75 per cent on average for 1990-2000? The reasons for

the recurring macroeconomic problems and the high inflation can be found in heavy state

intervention in the economy, the way in which public finances are managed and the

parliamentary situation. The present reforms are aimed at the first two factors. There are

reasons to believe that they will be much more successful than similar attempts in the

past, both because they are wider in scope and structural in character and because

12 The data have been run through a statistical filter to extract the fluctuations from the trend increase inindustrial production. The particular filtering method is due to Baxter and King (1999) and we have used aprogram supplied by Marianne Baxter on her homepage.13 It must be noted that the Turkish data on industrial production are reputed to be somewhat unreliable.Nevertheless, they were used, since the statistical techniques require longer time series than those providedby the alternative of quarterly GDP data.14 With statistical techniques, we have also investigated the degree of causality between the internationalbusiness cycles and the business cycles of Turkey, Greece, Portugal and Spain, and whether accession hasserved to increase the synchronization between the business cycles of the latter three and internationalbusiness cycles, particularly that of the EU-9. The statistical results were on the whole negative, with low

41

external constraints are more binding than in the past. Also, the general elections in 2002

gave one party a sizable majority in parliament; the past has seen a long succession of

coalition or minority governments.

As already mentioned, state intervention has been pervasive in the economy since the

1930's. State owned enterprises have been important in a wide range of sectors, such as

banking, electricity, paper, steel, coal, railroads, cement, tobacco, textiles and

telecommunications. The government has also set up state enterprises to service the

agricultural sector with various inputs and to buy up agricultural products at administered

prices. Privatization was part of the reform agenda of liberalization and market

orientation 1980, but until recently, the record has been dismal. In 1999, there were 49

non-financial state enterprises with about 430 000 employees.

Public finance management has had peculiar features in Turkey. As late as in 1999, a

substantial part of the activities of the public sector were carried out by semi-autonomous

entities called budgetary funds and extra-budgetary funds. The activities of the funds

could be divided into four categories: 1) public consumption and investment, 2) price

regulation and control, 3) transfers, such as subsidies and social security, and 4) insurance

and miscellaneous activities.15 In 1999, there were 83 different funds or fund-like

institutions. All but five had been closed down at the end of 2001.The funds received

their financing from the government budget, taxes and user charges, but they were also

used to raise tax revenue for the central government budget. The degree of autonomy of

the funds varied, but to some extent, they were free from central government control,

especially on the expenditure side.

In addition to the funds, there were other entities that could override central government

control, such as state economic enterprises, revolving funds, local administrations, and

social security institutions. Sak (2000) refers to an estimate that all arrangements

overriding central control reached 30 per cent of total public sector expenditures.

R2 's and insignificant or small coefficients. The exception is Spain, the business cycle of which is wellexplained by that of the EU-9, particularly in the 1990's.15 This categorization was made by Sak (2000), who gives a detailed account of the workings of the fundsystem.

42

The fund system goes back to the 1930's, but started to be exploited in earnest in the

1980's. It seems to have been a response to increasing needs for public services and to

effect structural change. The regular public finance system was not used for this purpose,

due to the legal, bureaucratic and political difficulties in raising taxes and redirecting

public expenditures to new areas according to Sak (2000). The system got somewhat out

of hand in the 1990's, because of the parliamentary situation. The 1990's saw a succession

of coalition and minority governments, where the political parties exploited the fund

system, state banks and other state enterprises to favor their voters and enhance their own

power. Thus, the problems of public finance in Turkey in the 1990's, which culminated in

the crisis in 1999-2001, were due to a combination of political competition and the

availability of public funds without sufficient control. The political parties were not

punished in elections, presumably because the system was not transparent and because

various interest groups had a perception of being favored.

The public sector ran a deficit equal to 24 per cent of GDP in 1999 according to the IMF

accounting. The Turkish treasury figure is lower, since it does not include the borrowing

made necessary by the operations of state banks.

The reforms started in 1999 are clearly focused on structural problems, in addition to

fiscal stabilization. They involve closing down most of the funds, the privatization of

state enterprises and a wide-ranging reform and privatization of the Turkish financial

sector that will bring regulations and supervision up to EU standards.

It remains to be seen to what extent the whole reform package will be enacted and

implemented. The history of stabilization programs and structural reforms in Turkey tells

us that some measure of skepticism is in place. Reforms have been implemented only

partially, and laws and regulations have been overlooked.

Naturally, the soft budget constraints and the heavy involvement of politicians in the

economy are not an accident. By handing out economic favors, politicians and political

parties have been able to favor their constituents and secure political power, which

43

seems to be an accepted part of Turkish politics.16 Once established, such a state of

affairs is hard to escape, since it requires that all political parties commit to move to

another state, where their power over the state budget has been curtailed. The incentive to

defect is potentially great, since economic favors will have more leverage in the absence

of competition from other political parties.

One way of moving to a better state of affairs is to seem to be forced by an outside

power. The role of the IMF and the EU can be seen in this light. Many of the measures

undertaken as a condition for IMF loans and EU membership are, of course, not popular

with politicians, interest groups and voters in general. But since they seem to be imposed

by outside powers for ends that most recognize as necessary - in the case of IMF

assistance - or desirable - in the case of EU membership - they can be accepted. In this

respect, it is also helpful that fiscal stabilization and structural reforms are a package

where the net outcome for a particular agent is less clear than in the case of isolated

changes in policy.

Another external constraint that must be mentioned is the private foreign debt. Prior to

the latest crises and depreciation of the currency, the private sector had a very small

amount of foreign assets and thus, devaluations did not cause any adverse wealth effects,

only favorable competitiveness effects. After the deregulation of capital movements in

1989, the private sector has accumulated a sizable stock of foreign assets and has suffered

capital losses during the latest crisis. This will be remembered by voters in the future, and

is likely to act as a new constraint on future governments in their handling of public

finances.

16 In fact, in her seminal paper on the phenomenon of rent-seeking, the most frequently cited economicspaper of the 1970´s, Anne Krueger (1973) was, to some extent, inspired by her studies of the Turkisheconomy, as shown by examples in the paper.

44

Conclusion

We have tried to identify and assess the most important political and economic issues for

Turkey’s accession to the EU. There are also several important issues that were not

mentioned, one of which is the cost for Turkey of adopting the environmental standards

as required by the acquis. This cost is likely to be very large. For example, most cities

have no or very rudimentary facilities for sewage treatment. Another issue is corruption.

There is plenty of anecdotal evidence that corruption is pervasive and deep-rooted in the

public sector, see Senatalar (2002) for some evidence. Presumably, to qualify for

membership, Turkey will have to demonstrate that it has taken steps to prevent corruption

and that these are being successfully implemented.

One conclusion is that Turkey seems to be able and willing to meet the economic criteria

for membership. In recent years – albeit under the pressure of an extreme economic crisis

and as conditions for IMF and World Bank loans – it has instituted a great number of

reforms in many areas: agriculture, the public sector, the financial sector, the state

enterprise sector, and so on. It remains to be seen to what extent and at what speed these

will be implemented.

Turkish membership is not expected to cause significant effects for the present EU

members, except perhaps the budgetary consequences. Turkey has a large population, a

low level of income and a large agricultural sector. All these factors combine to make

Turkey the largest net benefactor of agricultural and regional subsidies under the present

rules. In fact, we estimated that Turkey would receive 12 billion euro net, which

corresponds to about 14 per cent of the EU budget. (The overall net contribution to the

CEEC-10 and Turkey was projected to correspond to about 60 per cent of the present

budget.) For Turkey, the effects will be felt in the whole economy. However, many

reforms are already under way to meet IMF and World Bank conditions. Most

importantly, income support will be substituted for price support in agriculture, affecting

the third of the population that is dependent on agriculture for its living. The public

sector, the state enterprise sector and the financial sector are also undergoing reforms.

Turkey still has some way to go before it qualifies for participation in the Single Market.

45

Trade in industrial commodities is free from tariffs, but many trade barriers in the form of

administrative procedures, protection of property rights, technical standards and so on

remain to be tackled. Only when foreign direct investment flows to Turkey to the same

extent as to the more successful CEECs can we be certain that the reforms have been

successfully implemented.

The main obstacle to Turkish accession is in meeting the political criteria. Turkey needs

to make the military subordinate to its elected political bodies, extend cultural rights to

Kurds and other minorities, and uphold human rights. Whether Turkey will be able to

achieve this is in doubt, since it is perceived as a threat to the principles on which modern

Turkey was built and therefore, to the unity and integrity of the country.

46

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855 Tapio Palokangas, Capital Accumulation and Employment Cycles in a Model ofCreative Destruction, February 2003

856 Brendan Walsh, When Unemployment Disappears: Ireland in the 1990s, February 2003

857 Luis H. R. Alvarez and Erkki Koskela, A General Approach to the Stochastic RotationProblem with Amenity Valuation, February 2003

858 Christian Schultz, Strategic Campaigns and Redistributive Politics, February 2003

859 Ernst Fehr and Joseph Henrich, Is Strong Reciprocity a Maladaptation? On theEvolutionary Foundations of Human Altruism, February 2003

860 Haizhou Huang, Dalia Marin, and Chenggang Xu, Financial Crisis, Economic Recoveryand Banking Development in Former Soviet Union Economies, February 2003

861 Pedro Cardoso and Bernard M.S. van Praag, How Sustainable Are Old-age Pensions ina Shrinking Population with Endogenous Labour Supply?, February 2003

862 Volker Meier, Efficient Transfer of Aging Provisions in Private Health Insurance,February 2003

863 Edward Castronova, Theory of the Avatar, February 2003

864 Robert S. Chirinko, Hans van Ees, Harry Garretsen, and Elmer Sterken, InvestorProtections and Concentrated Ownership: Assessing Corporate Control Mechanisms inthe Netherlands, February 2003

865 Bernard M.S. van Praag and Pedro Cardoso, The Mix Between Pay-as-you-go andFunded Pensions and what Demography has to do with it, February 2003

866 Ernst Fehr, Urs Fischbacher, Bernhard von Rosenbladt, Jürgen Schupp, and Gert G.Wagner, A Nation-Wide Laboratory. Examining Trust and Trustworthiness byIntegrating Behavioral Experiments into Representative Survey, February 2003

867 Frank Heinemann, The Inflationary Impact of Wage Indexation, February 2003

868 Eytan Sheshinski, Bounded Rationality and Socially Optimal Limits on Choice in aSelf-Selection Model, February 2003

869 M. Hashem Pesaran, Estimation and Inference in Large Heterogenous Panels with CrossSection Dependence, February 2003

870 Luis H. R. Alvarez and Erkki Koskela, On the Tree-Cutting Problem under Interest Rateand Forest Value Uncertainty, February 2003

871 Norbert Berthold and Rainer Fehn, Unemployment in Germany: Reasons and Remedies,February 2003

872 Clemens Fuest, Bernd Huber, and Philipp Tilleßen, Tax Policy and Entrepreneurship inthe Presence of Asymmetric Information in Capital Markets, February 2003

873 Eytan Sheshinski, Optimum and Risk-Class Pricing of Annuities, February 2003

874 Willi Leibfritz, Paul O’Brien and Jean-Christophe Dumont, Effects of Immigration onLabour Markets and Government Budgets – An Overview, February 2003

875 M. Hashem Pesaran and Allan Timmermann, How Costly is it to Ignore Breaks whenForecasting the Direction of a Time Series?, February 2003

876 Thorvaldur Gylfason and Gylfi Zoega, Education, Social Equality and EconomicGrowth: A View of the Landscape, February 2003

877 Robin Boadway and Jean-François Tremblay, Public Economics and StartupEntrepreneurs, February 2003

878 Erkki Koskela and Roope Uusitalo, The Un-Intended Convergence: How the FinnishUnemployment Reached the European Level, February 2003

879 Robert Fenge and Volker Meier, Pensions and Fertility Incentives, February 2003

880 Eytan Sheshinski, Note on Income Taxation and Occupational Choice, February 2003

881 A B Atkinson, Income Inequality in OECD Countries: Data and Explanations, February2003

882 Thomas Gehrig and Rune Stenbacka, Venture Cycles: Theory and Evidence, February2003

883 Ralf Becker and Thomas Hellmann, The Genesis of Venture Capital - Lessons from theGerman Experience, March 2003

884 Eytan Sheshinski, Note on the Optimum Pricing of Annuities, March 2003

885 Paul De Grauwe and Magdalena Polan, Globalisation and Social Spending, March 2003

886 F. van der Ploeg, Do Social Policies Harm Employment and Growth?, March 2003

887 Mirjam van Praag, Initial Capital Constraints Hinder Entrepreneurial VenturePerformance: An empirical analysis, March 2003

888 Bernard Steunenberg, Coordinating Sectoral Policymaking: Searching forCountervailing Mechanisms in the EU Legislative Process, March 2003

889 Eytan Sheshinski, Optimum Delayed Retirement Credit, March 2003

890 Frederick van der Ploeg, Rolling Back the Public Sector – Differential effects onemployment, investment and growth, March 2003

891 Paul De Grauwe and Marc-Alexandre Sénégas, Monetary Policy in EMU when theTransmission is Asymmetric and Uncertain, March 2003

892 Steffen Huck and Kai A. Konrad, Strategic Trade Policy and the Home Bias in FirmOwnership Structure, March 2003

893 Harry Flam, Turkey and the EU: Politics and Economics of Accession, March 2003